Bitcoin Halvings

Bitcoin is, by design, resistant to change.

However, every 210,000 blocks (roughly every four years), the protocol cuts the reward earned by minersfor finding a valid block in half. This regular event is known as a halving.

So far, Bitcoin has undergone three halvings. The original block subsidy of 50 bitcoins was cut to 25 in 2012, 12.5 in 2016, and 6.25 in 2020. In total, the block subsidy will be halved 33 times. The final cut, which will happen around the year 2140, will mark the end of the block subsidy and signal that miners have created all 21 million bitcoins.

Like central bank interest rate announcements, halvings are highly anticipated events. But, unlike interest rate decisions, the adjustment leaves no room for conjecture. As a result, there's no need to parse past statements or evaluate forward guidance. Instead, Bitcoin reduces the block subsidy regularly and at a fixed amount, allowing network participants years to prepare for their impact.

‍

Why Does Bitcoin's Subsidy Halve?

Given the significance of halvings, it might seem odd that they don't get a single mention in the Bitcoin white paper. Halvings are part of the protocol's code, but Satoshi (the creator(s) of Bitcoin) didn't explain why.

That said, it's not hard to guess what Satoshi's reasoning might have been.

First, Satoshi designed Bitcoin to resemble a commodity. A common characteristic between Bitcoin and gold, for example, is that they both have finite supplies. Halvings infuse bitcoin with another attribute of non-agricultural commodities, diminishing supply growth. Again, consider gold. As miners unearth the yellow metal, there are fewer substantive deposits to be found. Over time, gold miners expend more effort to pull gold out of the ground. In the same way, a halving lowers bitcoin mining's yield.

Second, halvings could have been included as a way to ensure an equitable distribution. The first miners, who naturally were taking the most risk by contributing resources to an unproven network, were enticed to do so with larger rewards (in bitcoin terms) than those who would join at later dates. By this line of thinking, halvings calibrate risk and reward.

Finally, halvings may have been included in anticipation of bitcoin becoming more valuable. By this logic, the block subsidy shrinks over time because it takes fewer bitcoins to compensate miners for their work in dollar terms.

‍

How Halvings Affect Miners

All else being equal, halvings slice miners' profits in half. Thankfully, this doesn't come as a surprise. Miners have plenty of time to plan for lower block subsidies. Between halvings, they look for ways to streamline their operating costs.

So far, halvings haven't corresponded with significant drops in Bitcoin's hash rate. While less profitable miners inevitably face pressure, and some do close shop, those that remain have historically picked up the slack.

Nonetheless, this doesn't preclude the possibility that a future halving could, at least temporarily, trigger a material drawdown of the network's hash rate.

‍

Bitcoin's Price and Halvings

There's no shortage of opinions when it comes to the topic of halvings and the price of bitcoin.

On the one hand, because halvings are as certain as the seasons, some argue that they are "priced in." By this logic, bitcoin's price at any given time accounts for its disinflationary supply. On the other hand, because Bitcoin is still proliferating, the impact of halvings may not be well understood by all users. For example, new bitcoin holders who bought between halvings might not know that the network curtails the issuance rate every four years.

At first glance, bitcoin's price chart wouldn't seem to reveal any direct link between halvings and price. However, each of bitcoin's most notable bull markets has kicked off within a year of a halving. This correlation lends credence to the idea that halvings mark the beginning of a new cycle in bitcoin's ongoing price discovery.

Disclosures

‍This report has been prepared solely for informational purposes and does not represent investment advice or provide an opinion regarding the fairness of any transaction to any and all parties nor does it constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Charts and graphs provided herein are for illustrative purposes only. This report does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of New York Digital Investment Group or its affiliates (collectively, “NYDIG”).

It should not be assumed that NYDIG will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in managing client accounts. NYDIG may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this report.

The information provided herein is valid only for the purpose stated herein and as of the date hereof (or such other date as may be indicated herein) and no undertaking has been made to update the information, which may be superseded by subsequent market events or for other reasons. The information in this report may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies, techniques or investment philosophies described herein. NYDIG neither assumes any duty to nor undertakes to update any forward-looking statements. There is no assurance that any forward-looking events or targets will be achieved, and actual outcomes may be significantly different from those shown herein. The information in this report, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Information furnished by others, upon which all or portions of this report are based, are from sources believed to be reliable. However, NYDIG makes no representation as to the accuracy, adequacy or completeness of such information and has accepted the information without further verification. No warranty is given as to the accuracy, adequacy or completeness of such information. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this report to reflect changes, events or conditions that occur subsequent to the date hereof.

Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Legal advice can only be provided by legal counsel. NYDIG shall have no liability to any third party in respect of this report or any actions taken or decisions made as a consequence of the information set forth herein. By accepting this report in its entirety, the recipient acknowledges its understanding and acceptance of the foregoing terms.

This website is provided for informational purposes only. None of the material on NYDIG.com is intended to be, nor does it constitute, a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. You should conduct your own analysis and consult with professional advisors prior to making any investment decisions. Bitcoin investments have historically been highly volatile and are for investors with a high risk tolerance. Investors in bitcoin could lose the entire value of their investment.

Only certain NYDIG legal entities or businesses are regulated. New York Digital Investment Group LLC is not overseen by any regulator. Please see the NYDIG disclosures or terms and conditions for the particular service or transaction for more details. NYDIG Execution LLC (NMLS ID: 1781446) holds a BitLicense and a money transmitter license from the New York State Department of Financial Services (“NYDFS”) and NYDIG Trust Company LLC (NMLS ID: 1985471) is chartered as a limited purpose trust company by the NYDFS; both entities are authorized by the NYDFS to engage in virtual currency business activities. In addition, both entities hold money transmitter licenses from a majority of states and are registered with FinCEN as MSBs. No NYDIG entity is registered with or licensed by the SEC, FINRA, NFA, or CFTC. NYDIG Trust Company LLC does business under registered dba names in various states as disclosed here. NYDIG, NY\DIG, and NEW YORK DIGITAL INVESTMENT GROUP are registered trademarks of NYDIG. Loans made in California are made by NYDIG Funding LLC. Such loans are made or arranged pursuant to a California Financing Law license.

Bitcoin Halvings

Key Takeaways